Over the last 12 months, there has been a cultural transformation in attitudes towards climate change. Suddenly, it has become accepted that it's both happening and dangerous, that we are approaching a catastrophic tipping point and that it is disastrous that the Kyoto agreement to lower global greenhouse gas emissions by 12.5 per cent by 2012 compared with 1990 will be missed. Something must be done. The question is what.

Tomorrow, Nick Stern, the government's chief economist, delivers his 700 page report, commissioned by Chancellor Gordon Brown, setting out how economics can come to the rescue. Formerly chief economist at the World Bank, Stern is one of the best in the business and the report is an intellectual and political landmark. After tomorrow, we will have the best thought-through route map out of the crisis yet.

The report's originality is that it connects the economics of uncertainty and risk to the global economic impact of climate change. Nobody can be certain about the exact trajectory of the growth of carbon particles in the atmosphere or their relationship with global warming. It is an uncertainty that the Bush administration has seized on as an excuse to do nothing 'because it might damage the economy'. Nobody, especially Americans, should be asked to make any sacrifice until the facts become clearer.

This might make sense if the risk was analogous to insuring oneself against the infinitesimally small chance of a meteorite hitting you as you cross the road. However, carbon levels are already dangerous. If we are really lucky, the report warns, the world might get away with as little as a 5 per cent fall in global GDP, mass and protracted unemployment and tens of millions of deaths, including Americans, from the economic impact of rising sea levels, floods and droughts. If we are unlucky, there could be a calamitous 20 per cent drop in global GDP, mass starvation and hundreds of millions of deaths.

The key is water. A rise in temperature of, for example, 3 degrees centigrade, within the range of respected projections for the year 2100, would melt the already destabilised Greenland icecap and raise global sea levels by seven metres. Low-lying urban areas, from Shanghai to Florida, would become uninhabitable.

The world's governments have to find a way of acting collectively - and fast. Action by Britain alone would be a pinprick. If we became carbon-neutral tomorrow, it would reduce the world's annual carbon emissions of 33,000 million tonnes by just 2 per cent. If the EU acts together, on the other hand, there could be a dramatic impact on the 4,500 million tonnes of carbon it produces annually. If the EU, California and the nine states in the north east of the US pledged to do something, that could address an estimated 1,500 million tonnes of carbon those states produce. That, in turn, could stimulate change in India and China and the 7,000 million tonnes they produce. Suddenly, the world would have reached a critical mass of change.

There are three main ways to effect change: taxation, regulation and finding a way to persuade business to take the issue seriously. The problem with taxation and regulation is getting states to reach agreement quickly for fear that others might cheat. And as Stern and the scientists warn, we have only 10 years.

His preferred option is the third. The fastest method would be to set a world cap on carbon dioxide emissions, parcel out demanding targets for their reduction between countries and then organise a world trading system of carbon credits which rewards companies, airlines and power generators that lower their carbon emissions below their allocated targets and which penalises those that do not. The greener the company, the more advantage it will gain compared with its competitors.

The inclusion of airlines and nuclear and renewable power in the scheme is crucial. Carbon-emitting air travel would instantly become expensive - perhaps doubling fares - as airlines everywhere had to buy carbon allowances. Non-carbon-emitting nuclear and renewable power, on the other hand, would become very cheap. Less-developed countries could sell their carbon allocations to rich countries and with the proceeds invest in new, clean technologies. Thus the scheme gives global incentives to green economic activity everywhere while simultaneously enlisting the market to handle the uncertainties. If it becomes clear that the risk of climate change is overstated, the price of carbon will sink, but if it is as bad as some fear, the price will rocket. Markets will signal the risks.

Last year, the EU established precisely such a scheme. It has had a wobbly first 12 months. Too many EU governments set lenient targets and excluded too many industries, notably airlines. As a result, the price of carbon is a derisory €5 (£3) per tonne. But the scheme is up and running. With sufficient political will, it could be made better. For example, every aircraft in EU airspace could be required to buy a carbon allowance. EU governments could start to get serious about target-setting.

Indeed, making it work is now an economic and environmental imperative. Yes, carbon-emitting industries will have to buy carbon allowances, raising their costs. Stern reckons that if the world collectively spends 1 per cent of GDP on clean technologies and taxing environmental 'bads', we can avert disaster. If individual green American states join in an improved EU scheme, there could be immediate progress.

It is a remarkable and potentially optimistic prospect and the EU will have proved to have worth beyond measure. Even Eurosceptics do not deserve a grizzly end.